Digital Services Tax

The challenges and opportunities of taxing digital services in Latin America

Luiz Bento, Managing Partner, Gescon Consultoria Empresarial (AGN International, Brazil) spotlights rules surrounding taxation of digital services in LATAM


t’s a fact that commercial relations between the consumption and provision of services have totally changed in the last few years, channeling much more into the consumption of service than the provision of services itself.

Commercial activities related to service acquisition and consumption are increasingly tied to making content available for recurring remuneration (annual, monthly, and even daily), or providing access to a specific “service” for a certain fee. In general, the provision of content for a certain fee has typically been equated with the provision of services from the point of view of taxation. 

Luiz Bento, Managing Partner, Gescon Consultoria Empresarial (AGN International, Brazil)

Thus, the availability of content through “streaming”, “software”, and other means has followed the rules of the taxation of services in Latin America. In some cases and regions, this taxation follows the rules of value-added tax (VAT), with the definition of a system of credits and debits. In other cases, it follows the rules of taxation on services, considering cumulative taxation rules, without defining a specific tax on digital services.

Lack of control across jurisdictions

Globally, tax systems have been designed and guided by the physical presence of a company or individual in that specific country, so that they could carry out the “exploration” of that particular country’s market. The rules of permanent establishment, in general, have aimed to exactly characterise a certain physical (and now digital) presence to make taxation of a transaction feasible or not. The possibility brought by digital services to “explore” a given market or country, without the need to physically be established in that region, opened up several possibilities, and brought all types of controls to the test.

The governments of each country are also not at all comfortable with the idea of experiencing a certain lack of control over the management of companies that, in a way, may enter their markets, but that physically may be on the other side of the world.

Among the various possibilities that exist, certainly among those that most concern all government officials are aggressive tax planning, together with the possibility of tax evasion and/or foreign exchange by digital companies that have a taxing state which has no sovereign power over them (since they are physically located in regions other than their sovereignty). Thus, we see that the provision of digital services ends up affecting the sovereignty of certain countries, and the possibility of punishing (or not) a certain act performed by a certain company.

The case for LATAM

It’s important to note that the overwhelming majority of countries in South America and Central America are countries that have their taxation structured for the import of capital. In these cases, the taxation of income generated ends up occurring in each “State” that generates that income, and not in the headquarters (the final beneficiary of that income), as can happen in Europe or the United States. This is called the taxation of the “Source State” (also known as the income generator). Several methods are used for taxation to occur in the “Source State” (or income generator): Taxes withheld at the source, and the creation of local contributions and other taxes that are not part of agreements against double taxation. The main objective is for the income-generating State to retain a portion of the income generated in its own territory.

Emerging economies scenario

The creation of a specific line for the taxation of digital services is a necessary measure for developing countries. First, as a rule, developing countries are countries that will be technology importers. In addition, their markets will be directly affected by companies that are unlikely to bring the benefits corresponding to that company's participation or performance related to the consumption of the population in question.

In this sense, the counterpart that large corporations will be able to provide, from an economic point of view, should mainly occur through the taxation of the income that is transferred from one State to the other. As a result, taxing digital services will be an extremely important tool for this to happen. In the same vein, the definition of tax on digital services that has a certain similarity and uniformity is an important opportunity for the region to present itself in a more consolidated and organised way for investors, capital exporters who wish to enter the Latin American market in some way.

The conclusion is that the specific regulation of the taxation on digital services is something very necessary for developing countries. Such a situation is also a great opportunity for the region to organise itself better and prove more attractive and safer to capital exporters. The chessboard pieces must be well organised and played intelligently.

On the one hand, if the consumer market for digital services in Latin America becomes huger and presents a major attraction for large corporations, then it is up to government officials from Latin America to act in an organised and intelligent fashion so that they can receive their due compensation in a fair way, according to the extent of their assets (consuming market, country risk and others). In turn, major companies have large markets in Latin America to explore yet must do so while staying aware that there’s a "premium price" to pay for the "online exploration" of a given country’s market, because the counterpart’s economy is much lower than the on-site exploration of a country’s market.